KBRA Downgrades Ratings for Eagle Bancorp, Inc.

KBRA downgrades the senior unsecured debt rating to BBB- from BBB, the subordinated debt rating to BB+ from BBB-, and affirms the short-term debt rating of K3 for Bethesda, MD-based Eagle Bancorp, Inc. (NASDAQ: EGBN) (“Eagle” or “the company”). Additionally, KBRA downgrades the deposit and senior unsecured debt ratings to BBB from BBB+, the subordinated debt rating to BBB- from BBB, and downgrades the short-term deposit and debt ratings to K3 from K2 for EGBN’s subsidiary, EagleBank. The Outlook for all long-term ratings is Negative.

Key Credit Considerations

The downgrade of the ratings and maintenance of the Negative Outlook are driven by significant credit quality challenges that led to weakened earnings throughout 2024 and substantial operating losses during the first half of 2025. The asset quality deterioration stems from structural issues within the office loan portfolio, which has historically represented a sizable portion of the loan book, particularly in the Washington, D.C. metro area. The portfolio has been adversely affected by elevated interest rates, the shift toward hybrid work arrangements, and recent federal government efficiency initiatives, which have resulted in widespread lease terminations by agencies and contractors - contributing to rising vacancy rates in the region. As a result, sustained valuation pressures have driven significant collateral write-downs, necessitating elevated provisions for loan losses. Specifically, in 2Q25, EGBN recorded a substantial loan loss provision of $140 million and NCO ratio of 4.2%. This was primarily related to the office portfolio and resulted in a sizable net loss, including an ROA of (2.3%) during the quarter. Credit challenges could persist with ~37% of its income-producing office portfolio, totaling $305 million, scheduled to mature in 2026. Management plans to pursue an asset disposition strategy for the office portfolio which could lead to additional losses being recognized and further pressure on earnings and capital. With respect to the CRE office portfolio, it comprises 22% of the total investor CRE segment and represents the vast majority of the company's total office exposure ($965 million) with only a minimal portion attributable to owner-occupied properties. Moreover, the criticized and classified loan composition is largely centered in the CRE office book (29% of total), with Class B properties comprising 16% of total and Class A properties another 11%. The broader income-producing CRE portfolio remains largely non-office, accounting for 78%, with risk ratings remaining relatively stable. Historically, EGBN has maintained a conservative approach to capital management, CET1 ratio averaging 250 to 300 basis points above peers over the past several years. However, the company's elevated exposure and concentration in investor CRE, totaling approximately 367% of risk-based capital as of 1Q25, including an above-average exposure to office loans (13% of total), may reduce the cushion to absorb future losses. EGBN’s funding profile, which has a comparatively higher reliance on wholesale funding (brokered deposits/FHLB), is partly a function of its key operating markets in the highly competitive Washington, D.C. MSA. Moreover, Eagle is prioritizing acquisition of digital deposits, which is expected to help in the stabilization of NIM.

Rating Sensitivities

A return to Stable outlook would require a reversion in recent credit and earnings trends. We also expect the company to maintain its focus on enhancing the funding base through its core deposit growth initiatives. Given the Negative Outlook, a further downgrade in the ratings is possible over the medium term, which could occur from further deterioration in earnings performance due to continued significant credit quality issues. We acknowledge that capital ratios will likely be pressured from potential workout plans with the office portfolio, though if core capital measures were to slip below similarly rated peers - it could also place pressure on the ratings.

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